Marriage is an event that bonds two people together, creating a legal and cultural connection for a lifetime. People marry for many reasons: love, companionship, financial stability and the desire to build a family. But sometimes, the bond of marriage breaks.
Between 4 to 5 million people get married every year in the U.S., and up to 53% of those marriages end in a divorce, according to the U.S. National Center for Health Statistics. Even with such staggering odds, the divorce rate in the U.S. is only the 13th highest in the world. The divorce rate in the beautiful islands of the Maldives is the highest.
Planning for a divorce is not top of mind for most when they agree to commit to a person for life through the act of marriage. Sadly, however, we should not dismiss that it could become a reality. If it does occur, there will be many issues to deal with, such as dividing marital assets and debt, custody issues and spousal support. Not surprisingly, when a divorce does happen, it can have a shattering effect on your life, both emotionally and financially.
Implementing a prenuptial agreement prior to marriage could make sense for a variety of reasons. You or your future spouse may bring substantial wealth into the marriage, own a business, plan on placing their career on hold to raise children, or have a high debt level.
A prenuptial agreement, often called a prenup, is a written contract entered into by a couple that enables them to control and manage the legal rights and obligations acquired once they are married. Implementing a prenup allows both parties the opportunity to address and discuss their expectations, fears or concerns before committing to a lifelong relationship.
Additionally, a prenup can help ease the strain if a divorce occurs, because the division of assets is typically negotiated and agreed upon by both parties in advance of the marriage.
Less common than a prenuptial agreement is a postnuptial agreement, which is created after marriage. A postnuptial agreement allows a married couple to protect themselves and their assets in the case of a future divorce. Financial circumstances may change during the marriage, such as a spouse winning a lottery or having an extramarital affair. The postnuptial agreement could help to define the division of assets if a divorce were to occur, providing peace of mind within the marriage.
In addition to experiencing a full array of emotions during the divorce, you will be managing your new household and your finances. How do you prepare for this transition?
— Ask people in your life for referrals to attorneys who specialize in mediation and divorce. Then interview a few attorneys prior to engaging them. What is their experience? Who is their target client? What are their fees? As a client, who will you have contact with at their firm?
—Document all conversations related to your divorce.
—Invest in binders to organize your financial data so it is readily available as you transition through this phase.
—Gather and review your tax returns. If you are not familiar with your tax returns, ask a certified public accountant (CPA) that represents you to review and explain the tax returns to you.
—Identify your income and all your monthly expenses. This information will be key in settling your temporary and permanent spousal support. Start tracking this information, so you are prepared to implement a new household monthly budget as your income changes due to the divorce.
—Continue paying your debts in a timely manner. Pay off and close any joint accounts as soon as possible.
—Gather all your statements reporting assets or liabilities, such as your bank, mortgage, credit card, retirement, and investment accounts.
—Change the passwords on your email, social media, and financial accounts. Select a password that is independent of your life with your soon-to-be ex-spouse.
—Write a letter to the credit bureaus, informing them of the divorce. Have a fraud alert placed on your credit reports if you are concerned that your spouse may try to open new accounts under your identity.
Do not agree to split any of the assets without the counsel of a professional who understands your unique situation.
Should you take a brokerage account versus a retirement account? Does your spouse have a pension, and if so, what is your share? Who will pay for your health insurance? Is your spouse paying for your children’s future college expenses? Should you keep or sell the house? Who is responsible for paying the mortgage, insurance, and property tax prior to selling the home? How long will your alimony last?
Do not be a passive observer when you are settling your divorce. Ask questions. If you don’t understand an explanation, ask for clarification.
Following your divorce:
—Implement and follow a budget based on your new circumstances.
—Confirm that all joint accounts are closed.
—Refinance your home and auto loan into your name.
—Remove your former spouse as the beneficiary on your retirement accounts, annuities, and life insurance policies.
—Reassess and update your personal insurance coverage, as necessary.
—If you change your name, contact the Social Security Administration to update your information with them and discuss your benefits.
—Create an emergency reserve. Keep six months to a year of expenses in a cash reserve account.
—Meet with your CPA to understand the tax implications of filing as a single or head of household filer.
—Meet with your financial advisor to review your investment holdings and to run new retirement plan projections.
—Meet with your estate planning attorney to update your trust, will, power of attorney, and healthcare directives.
—Check your credit score.
Financial insecurity following a divorce is real. When you go through a divorce, it often means your lifelong plans, hopes, and dreams are altered. Your divorce was undoubtedly not the intention when you took your matrimonial vows. By taking control of your finances, you will begin to rebuild your future, discover who you are as an independent person, establish new dreams, and, hopefully, in the interim, realize that you will be okay.
Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com